Moody’s places ratings of BOC, HNB and Sampath Bank on review for downgrade

• Rating action follows SL being placed by Moody’s for rating review for downgrade

Moody’s Investors Service has placed the B2 long-term local currency deposit and foreign currency issuer ratings of Bank of Ceylon (BOC), Hatton National Bank Ltd. (HNB) and Sampath Bank PLC (Sampath) on review for downgrade.

At the same time, Moody's has downgraded the Baseline Credit Assessment (BCA) of BOC to b3 from b2 and placed it on review for further downgrade. Moody's has also placed the B2 BCAs of HNB and Sampath on review for downgrade, the rating agency said in a statement. 

The outlooks have been changed to rating under review from stable.

The rating actions follow Moody's placement of Sri Lanka's B2 sovereign rating on review for downgrade. For more information on the sovereign rating action, please refer to the Government of Sri Lanka issuer page on www.moodys.com.

Details of Moody’s decision is given below. 

The decision to place the banks’ assessments and ratings on review for downgrade reflects Moody's placement of Sri Lanka's B2 sovereign rating on review for downgrade. Moody's believes that there is a high level of dependency between the creditworthiness of Sri Lankan banks and that of the sovereign, because the banking operations are largely domestic and the banks hold significant amounts of sovereign debt. In addition, the sovereign's credit strength is a key input to Moody's assessment of the government's ability to support the banks in times of need.

The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, volatile oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The Sri Lankan banking system has been one of the sectors affected by the shock, given Sri Lanka's weak economy and heavy reliance on external borrowings.

Moody’s regards the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. Today's action also incorporates the negative impact on BOC, HNB and Sampath of the breadth and severity of the shock, and the likely deterioration in the banks' asset quality and in the Government's ability to support these banks in times of need.

The action also incorporates the negative impact on BOC, HNB and Sampath of the breadth and severity of the shock, and the likely deterioration in the banks' asset quality and in the Government's ability to support these banks in times of need.

Sri Lanka’s already weak economy will take a further hit from the widespread disruption to tourism, export-oriented sectors and domestic activities because of the coronavirus pandemic. The deterioration in macroeconomic conditions also has the potential to substantially weaken the banks' asset quality and profitability.

At the same time, the risk-off sentiment among global investors could also hinder the Government's access to external borrowings, exacerbating the deterioration in the Government's fiscal position and ability to support the banks in times of need. The degree of negative impact will depend on the length of the disruption, which is uncertain at this point.

The downgrade of BOC's BCA mainly reflects the deterioration in the bank's asset quality, as well as the bank's low capitalisation when compared to its Sri Lankan peers. BOC's problem loan ratio, based on the proportion of stage 3 loans under the equivalent of IFRS (International Financial Accounting Standard) 9, rose to more than 10% as of 31 December 2019 from 9.2% a year ago amid subdued tourism activity following the Easter Sunday 2019 terrorist attack.

The bank's Common Equity Tier 1 ratio of 11.4% as of 31 December 2019 is also modest relative to the rated peer average of 13.4%, reflecting a weak loss buffer amid a deteriorating operating environment. Despite its weakening solvency, Moody's expects the bank's funding and liquidity will remain stable over the next 12-18 months.

Moody's incorporates a very high probability of Government support in the ratings of BOC, reflecting the bank's systemic importance as the largest bank in Sri Lanka and the Government's full ownership of the bank. As a result, BOC's B2 long-term local currency deposit and foreign currency issuer ratings are one notch higher than the bank's BCA.

While Moody's incorporates a high probability of Government support in the long-term local currency deposit and foreign currency issuer ratings of HNB and Sampath, in line with the banks' sizable market shares in terms of deposits, the ratings do not benefit from any uplift because the banks' BCAs are already at the same level as the sovereign rating.

Factors that could lead to an upgrade or downgrade are given below.

Given the review for downgrade, the banks' BCAs and long-term ratings are unlikely to be upgraded during the review period. Nevertheless, Moody's could confirm the ratings with either a stable or negative outlook if the coronavirus situation eases and the impact on Sri Lanka's economy and the Government's ability to refinance its debts is not as severe as Moody's currently anticipates.

A downgrade of the sovereign rating could lead to a downgrade of the banks' BCA and long-term ratings. Moody's could also downgrade the banks' BCAs if there is a material deterioration in asset quality. A significant decline in capitalisation will also exert downward pressure on the banks' BCAs.